PAUL MCBETH: Is a wholesale caveat emptor a bad thing?

Paul McBeth is the editor of The Bottom Line and Curious News, having worked at BusinessDesk for 15 years.

The Financial Markets Authority didn’t have a great day in the office when its attempt to force a bit more due diligence from companies raising money from supposedly smart investors was tossed out of the courts.

But the market watchdog made clear it’s not done when it comes to firms operating in the unregulated capital raising space and the wise-sounding wholesale or eligible investors. It’s working with its pointy-headed friends over at the Ministry of Business, Innovation and Employment on what the right policy settings are.

The fear being that regular sods like you and I who don’t cross the vaunted threshold of being able to – or choosing not to – waive our investor rights are getting bamboozled by those smooth-talking suits and signing our life savings away to some cockamamie scheme that will inevitably go bust.

The FMA strode in, 10,000-word briefs at the ready, to protect us by forcing those firms to make sure our bona fides were solid and we were in fact sophisticated enough to participate.

In the High Court, Justice Sally Fitzgerald noted the market regulator’s approach tended to undermine the concept of self-certification, which is kinda central to the entire eligible investor regime.

These people are meant to be big enough and ugly enough to look after themselves, especially when they have a regulated professional, like their lawyer, accountant or financial adviser, confirm they can sign off on their investment ability, something the judge described as a “serious and solemn process”.

No such thing as a one-side coin

That’s not to say that anyone looking to raise money from the elite investor class can take it willy-nilly.

The judge pointed out would-be offerors can’t just accept money where the certificate is obviously out of whack – think the old gag of the three kids in a trench coat pretending to be an adult, or the self-proclaimed trapeze artist cited in the judgment.

And Justice Fitzgerald had sympathy with some of the regulator’s concerns, acknowledging the regime might’ve fallen down in some of the instances put to her.

As the judge stressed, that’s a matter for Parliament, not the courts.

Given the regulator has made clear wholesale investments are at the top of its most wanted list, little wonder it’s still seeking to weed out ne’er-do-wells from the financial markets.

That’s the right thing to do, and we should expect the FMA to pursue prosecutions of wholesale issuers it believes have been flogging their wares to retail investors who should be covered by the standard protections, in much the same way that any other goods sold to consumers attract a baseline protection.

Shadow boxing

The regulator put various instances of self-certification that was seemingly left wanting to the judge – it’s hard to be sure without having the evidence tested – and if just one investor wasn’t of the eligible kind, the entire wholesale offer is tainted, carrying some hefty consequences, including for the person claiming to be a sophisticated sort.

If there are offers out there that have been put to retail investors, they really need to be prosecuted before they get to the stage that stricken property developer Du Val got to, when its labyrinthine structure was teetering and the government went in all-guns blazing with the appointment of PwC veteran John Fisk as a statutory manager.

Because we’ve all seen those offers in our various social media feeds, or opened the letter box to find another shiny flyer pitching 10% returns, as if that’s a magic number good enough to consider but not so outrageously high as to get the alarm bells ringing.

Warning letters and media releases don’t seem to have the same name-and-shame heft as they might have once had, and the regulator might just have to weigh up the risk of taking an unsuccessful case against the potential reward of winning a prosecution.

The judge felt she had to remind the FMA that the conduct legislation’s purpose isn’t simply to protect investors, but to also to make sure businesses are confident participants and don’t have to carry an unfairly hefty regulatory burden.

In the beginning

In fact, revisiting the legislation, the purpose is to promote confident and informed participation of businesses, investors and consumers in financial markets and to promote and facilitate the development of fair, efficient and transparent financial markets.

Yes, investor protection is an important part of that, but it doesn’t mean swaddling them in cotton wool.

And while it’s hard to argue against the fact that regulated products should provide the greatest level of transparency and all the good things that follow, we should be embracing the longer-term players operating in the wholesale space, such as primary sector investor MyFarm or the growing number of pre-IPO companies listed on Catalist, where there’s a proactive approach in making public limited forms of disclosure.

Both examples are worthy of applause and the type of behaviour the legislation wanted to encourage after the swindling of thousands of retail investors when they chased an extra couple of percentage points’ return in the finance company debacle almost 20 years ago.

Forcing out operators who seek to take advantage of investors doesn’t have to be at the expense of encouraging others to do more than the bare minimum.

Just because we’re not making any headway in getting new products out to regular retail investors doesn’t mean we need to ditch wholesale offerings too.

 Image from Romain Dancre on Unsplash.